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Taxing intermediaries working for the public sector: just the start?

A gambler might struggle to get odds on the Chancellor of the exchequer, Philip Hammond, not extending new rules on the taxing of intermediary companies.

Life is certainly about to get tougher for anyone working through a personal service company (PSC) or other intermediary structure for the public sector. From April, the organisation being worked for may have to deduct tax and National Insurance contributions as if the contractor is on PAYE.

The changes represent a significant removal of tax advantages and will impact on anyone working under intermediary arrangements for Government departments; police and fire authorities; the NHS; educational establishments, including universities; and also a whole raft of other organisations, including the BBC, Channel 4, the General Medical Council, certain museums and art galleries.

The broad rule of thumb will be: If the service is being provided by someone who, were it not for the intermediary structure in place, otherwise would evidently be an employee of the organisation, tax must be deducted as if they were. A number of high-profile cases drew attention to the practice, including television personalities working solely for one broadcaster but through corporate structures to reduce their tax bills.

More to come?

Will Mr Hammond go further? The changes square with a consistent ambition to even out what he sees as unfair advantages enjoyed by the self-employed over those on PAYE. But they do not apply to anyone using their personal service company to work for a private business. Yet.

It should certainly be kept in mind ahead of his next Budget that he could decide to extend the changes to include the private sector, a move which might also deter people from avoiding public sector contracts with their now fewer tax advantages.

And we live in an age of changing employment arrangements, the so-called ‘gig economy’. This has led to more people becoming self-employed. It would not be surprising with this new working reality, not to mention a need to maintain the tax take, for the Chancellor to soon extend the rules on intermediaries.

As for those caught up by the changes currently being introduced, there is no action that the PSC needs to take. Responsibility for paying the tax will fall squarely on the public body. But contractors do need to brace for the impact on their finances.

The owner will face a challenge to their cash flow and the need, perhaps, to reclaim tax from HMRC.

A question will arise as to whether it is worth the contractor retaining the PSC, with the attendant administration costs and reporting responsibilities, or try to convert the role into that of an employee. That may not be easy. Many organisations in the public sector are busier out-sourcing than employing.

The other option is simply to charge more, if possible, to compensate for the loss of tax advantages.

These might be marked. After the changes, the PSC will also lose the ability to offset business overhead costs associated with the work against their tax liability. This effectively removes one of the key advantages of such arrangements.

Many people, such as those working as IT consultants, interim managers, locums and others, could be about to see their take home pay considerably reduced.

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